What Works In Equity Crowdfunding -- Insights From Research

Stanislav Mamonov, PhD, is an assistant professor at Montclair State University's Dept of Info Management & Business Analytics

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As we have recently celebrated the fourth anniversary of the signing of the JOBS Act into law, it is a good time to take stock of the effect that the legislature had on equity crowdfunding in the United States. It is important to note, that equity crowdfunding is distinct from the rewards-based crowdfunding, exemplified by Kickstarter, in which project backers are typically motivated by the rewards (discounts), but receive no equity in the ventures. While the rewards-based crowdfunding has always been legal, public solicitation of equity investments (equity-based crowdfunding) was prohibited by the Securities and Exchange Acts of 1933 and 1934.

The JOBS Act contains several provisions that made it easier for the entrepreneurs to raise funding. Title II of the JOBS Act took effect in September 2013 and it allows entrepreneurs to raise funding via online equity crowdfunding platforms from accredited investors. Title III of the JOBS Act took effect in May 2016 and it expanded equity crowdfunding to include non-accredited investors. I recently completed several research projects focusing on leading Title II equity crowdfunding platforms and I will share a few emergent insights here.

Since the passage of the JOBS Act, over $1.27 billion had been committed to more than 6,000 entrepreneurial ventures under Title II. Our analysis revealed that real estate investments have done particularly well under Title II. Patch of Land reports having facilitated more than 500 investments totaling over $300 million. In retrospect, it does not seem surprising that real estate investments do well under Title II because real estate loans represent a large commercial opportunity and they also afford investor protection by securing the loans with the underlying real estate assets.

Chart 1Montclair State University

Outside of real estate, Crowdfunder, a Title II platform, has also shown good traction in facilitating fundraising by early stage ventures. We examined 337 projects that attracted over $183 million in funding commitments between September 2013 and December 2016. Our analysis suggests that investors on the Crowdfunder platform are largely relying on a single signal to guide their investment decisions, namely whether a particular venture had secured funding from an established professional venture capital firm prior to running an equity crowdfunding campaign. For example, Revl, a smart action camera, had gone through Y Combinator and received funding from Comcast Ventures prior to launching a campaign on Crowdfunder, which exceeded the funding goal by more than 3X and raised over $9 million. The results imply that investors on Crowdfunder are willing to invest if a startup has been vetted by an established VC firm.

Chart 2Montclair University

Our preliminary analysis of Title III platforms suggests that these platforms can be a good fit for ventures that have relatively modest (under $300,000) funding requirements. WeFunder has emerged as the leading platform in Title III equity crowdfunding having hosted over 40 fundraising campaigns in the first 9 months since Title III legislation took effect.

So what does this mean for the entrepreneurs? There are at least two clear takeaways. First, equity crowdfunding may be a good venue for securing asset-backed loans from accredited investors. Second, equity crowdfunding platforms may be a good source of supplementary capital for ventures that have successfully raised funding from traditional VCs.

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